U.S. Stocks Post Biggest Retreat Since 2009 on Economic Concern

Pedestrians pass in front of the New York Stock Exchange
Pedestrians pass in front of the New York Stock Exchange (NYSE) before the trading day begins in New York on Aug. 5, 2011. Photographer: Scott Eells/Bloomberg

U.S. stocks tumbled, sending the Standard & Poor’s 500 Index to its biggest four-week loss since March 2009, as concern the global economy is stalling overshadowed the cheapest valuations in 2 1/2 years.

Hewlett-Packard Co. plunged 27 percent this week, the most since the October 1987 market crash, after a strategy shift undermined confidence in its managers. Technology, industrial and raw-material companies in the S&P 500 dropped at least 6.9 percent, the most among 10 groups. Caterpillar Inc. and Alcoa Inc. retreated more than 8.4 percent after some of the world’s biggest banks -- Morgan Stanley, JPMorgan Chase & Co. and Citigroup Inc. -- slashed economic growth forecasts.

The S&P 500 lost 4.7 percent to 1,123.53. It has sunk 16 percent since July 22 as about $3 trillion was erased from the value of U.S. equities, according to data compiled by Bloomberg. The Dow Jones Industrial Average fell 451.37 points, or 4 percent, to 10,817.65 this week, extending its four-week decline to 1,863.51 points.

“We’re in a little bit of a tug of war,” David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc., said in a telephone interview. His firm oversees $693 billion. “On the one hand, there’s the real concern about what’s going on in Europe, about the pressure on the banking system and weakness in the global economy. On the other, an opposing force seems to be an interest in buying at attractive equity valuations.”

Cheapest Since 2009

The S&P 500 has fallen 18 percent from an almost three-year high on April 29 amid concern about Europe’s government debt crisis and a global economic slowdown. The decline through Aug. 8 drove the index to a valuation of 12.2 times reported earnings, the lowest level since March 2009. Its price-earnings ratio is now 12.3, compared with the average of 16.4 since 1954, according to data compiled by Bloomberg.

This week’s loss included the S&P 500’s 4.5 percent retreat on Aug. 18 amid speculation that European banks lack sufficient capital. Lars Frisell, the chief economist at Sweden’s financial regulator, said it won’t take much for interbank lending to freeze. The market also declined after U.S. jobless claims rose, Philadelphia-area manufacturing shrank by the most since 2009 and hopes for more stimulus from the Federal Reserve receded.

The Morgan Stanley Cyclical Index of companies most-tied to economic growth plunged 10 percent this week, extending its loss since July 22 to 26 percent and falling to the lowest level since Aug. 26, 2010. Morgan Stanley economists cut forecasts for global growth this year and said the U.S. and Europe are “dangerously close to recession.”

JPMorgan, Citigroup

JPMorgan said the U.S. may expand less than previously projected in the next two quarters as consumer sentiment drops and the housing market fails to gain momentum. Citigroup also cut estimates for the U.S.

“We separate the economic picture from the investment picture,” Eric Teal, chief investment officer at First Citizens Bancshares Inc., which manages $4 billion in Raleigh, North Carolina, said in a phone interview. “If the economy is lackluster and stagnant, that does not imply that the stock market has to continue to decline. With valuations where they are, we find the market to be attractive. Companies are generally in good shape, and earnings growth can continue to be quite strong.”

Profit at S&P 500 companies is forecast to rise 17 percent to $99.05 a share in 2011 and 14 percent to $112.81 in 2012, according to average analyst estimates compiled by Bloomberg.

Moving Together

Stocks in the S&P 500 are moving in lockstep with each other by the most since at least 1990, a sign that the market’s biggest retreat in three years may not be over, according to MF Global Holdings Ltd. The average correlation coefficient between the 500 companies and the index was 0.8268 on Aug. 18, using 60 days of data, according to MF Global.

High correlation “is usually the case in a bear market, when investors are liquidating equities as an asset class,” Craig Peskin, co-head of technical analysis at the New York-based firm, wrote in an e-mail on Aug. 18. “In a bull market, when investors are differentiating, we see low or falling correlation.”

Correlation among S&P 500 stocks exceeded 0.78 twice previously, according to MF Global. After the first time, on Dec. 1, 2008, the S&P 500 declined 17 percent to a 12-year low on March 9, 2009. Correlation peaked again on July 26, 2010, when the benchmark slipped 6.1 percent over the next month, data compiled by MF Global and Bloomberg show.

Buffett Buys

Warren Buffett’s Berkshire Hathaway Inc. accelerated stock purchases on Aug. 8 as the S&P 500 plunged the most since December 2008, the billionaire investor said during an Aug. 15 interview with Charlie Rose on PBS.

“I like buying on sale,” said Buffett, Berkshire’s chief executive officer. “Last Monday, we spent more money in the stock market buying than any day this year.”

History shows the S&P 500 may keep sinking. The index plunged 16 percent between July 25 and Aug. 8. The eight declines of that size over similar amounts of time since 1928 led to additional losses averaging 17 percent, according to data compiled by Bespoke Investment Group LLC, a Harrison, New York-based research company.

Bearish wagers against global stocks at hedge funds have surged to the highest level since July 2009 as the European debt crisis and reports showing an economic slowdown cause the biggest losses in almost three years.

Hedge Fund Survey

An index of hedge fund assets from International Strategy & Investment Group dropped to 45.8 on Aug. 16, showing the most short selling in two years, down from a 2011 high of 54.2 in February. The research firm and broker-dealer surveys 35 hedge funds with about $84 billion under management every week.

“The fear factor is so high after what happened in 2008 that people are overreacting,” Eric Marshall, the director of research at Hodges Capital Management Inc., said in a telephone interview. Hodges has about $700 million in assets. “People are assuming that we are somehow in store for another great recession that would last several years, and I don’t see that.”

Hewlett-Packard tumbled 27 percent to $23.60. Leo Apotheker cut sales forecasts for the third time since becoming chief executive officer in November, citing tepid demand. He’s spinning off the personal computer unit, dropping a five-month-old plan to put the WebOS mobile software on devices and purchasing Autonomy Corp. for $10.3 billion. While aimed at helping add higher-margin products, the shifts are costly and may be time consuming, said Brian Marshall, an analyst at Gleacher & Co.

Losing Confidence

“People just lost confidence in the company,” said Marshall, who is based in San Francisco and has a “buy” rating on the stock. “People are realizing the financial model is in greater disarray than they previously thought.”

Motorola Mobility Holdings Inc. surged 55 percent to $37.86. Google Inc., the biggest maker of smartphone software, agreed to buy it for $12.5 billion, gaining mobile patents and expanding in the hardware business.

Larry Page, the Google co-founder who took over as chief executive officer in April, is pushing the Web company into smartphones to take on Apple Inc.’s iPhone and gain more clout for its Android software in the wireless business.

Google retreated 13 percent, the most since November 2008, to $490.92. Apple fell 5.6 percent, the biggest weekly drop since March, to $356.03.

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